The State of American Retirement
Did you know that there are around 60 million hardworking Americans who don't have access to retirement plans through their jobs? That’s 40% of the workforce! As you can see, there’s a significant gap in retirement plan access in America. Despite the federal government’s multiple attempts to address the issue by enacting legislation designed to reduce barriers and provide incentives to encourage retirement plan adoption by small businesses - the retirement plan access "gap" persists.
In fact, research from the Center for Retirement Research at Boston College reveals that approximately 50% of all private-sector workers in the United States are provided access to workplace retirement savings programs. This difference has led State and local governments to express concerns regarding an impending "retirement crisis" and has prompted them to actively explore solutions to bridge this gap - including mandating that every private employer sponsor a payroll-deduct retirement savings program for their employees.
Nevertheless, this is a government mandate we can and should all support!
In fact, 19 states have already enacted legislation requiring that every private employer offer a workplace retirement savings program for their employees, and an additional 28 states are currently exploring similar measures or have introduced legislation to create state-sponsored retirement programs. As a result, there are essentially two types of programs being created: Mandatory Programs & Voluntary Programs
The Emergence of State Auto-IRA Mandates
State-sponsored retirement programs exhibit significant variations beyond their mandatory versus voluntary nature. The majority of these programs revolve around a payroll-deduct Roth IRA (after-tax), ensuring the automatic enrollment of all eligible employees, commonly known as "Auto-IRA."
Typically, businesses that have operated for a minimum of 2 years and employ a specific number of individuals, usually 5+, are obligated to establish a program within a specified timeframe. However, it is important to note that business owners have limited influence over the design of their individual plans, as these programs follow a standardized, one-size-fits-all approach.
A state-sponsored Auto-IRA program is a minimalistic retirement option (i.e., better than nothing), but it generally lacks the inherent flexibility and control business owners have come to expect.
State’s Progress Mandating Retirement Savings Programs for SMBs & Individuals
Voluntary Retirement Savings Programs
State-Mandated Retirement Savings Programs
*Currently, there are 24 states working on creating mandated retirement savings programs, while the 18 above have passed legislation or have active programs.
What is the Secure 2.0 Act of 2022?
The Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act was signed into law at the end of 2022, bringing many current and future enhancements to qualified retirement plans. The new provisions are intended to enable employers, the federal government, and the retirement plan industry to collaboratively work to close the retirement plan access gap among small businesses and help more working Americans to save.
There are now three distinct tax credits available to small business owners for plan fees and/or contributions paid by employers, which were initially implemented in the original SECURE Act and have since been significantly enhanced under the newly enacted SECURE Act 2.0.
Note: The auto-enrollment tax credit became much more relevant due to the fact that the majority of all 401(k) plans will be required to adopt an auto-enrollment feature by 2025.
The SECURE 2.0 Act Background
In 2019, Congress passed the “original” Setting Every Community Up for Retirement Enhancement Act (aka “The SECURE Act”). The law was designed to entice small businesses to install workplace retirement savings programs and encouraged business owners to automatically enroll their employees.
Then in 2022, with the enactment of The SECURE Act 2.0, the original “start-up” tax credits were significantly enhanced, and additional tax incentives were created to encourage employer contributions.